Requirements for remuneration policy in financial services sector

On 29 April 2009 the European Commission issued theRecommendation on remuneration policy in the financial services sector (Official Journal L 120/2009). Uniform principles apply to all companies operating in this sector and should be applied primarily to employees whose job description has a substantial impact on the risk profile of the company. The remuneration policy will also be subject to the supervisor’s assessment. The Recommendation is not legally binding but the Commission envisages the adoption of regulations that will reflect the main requirements of the remuneration policy. Member States should take the necessary measures to implement the Recommendation by the end of this year.

The Commission namely requires an amendment of the existing pay practices, which do not conform to the principles of effective risk management; it refers mainly to the remuneration of short-term results achieved by excessively risky activities and practices that, on the contrary, mean higher losses for the company in the long-term. The required remuneration policy should reflect long-term goals of a company and should not create excessive exposure to risk.

The Recommendation sets out the principles forthe structure of remunerations and measurement of results. The performance component of remuneration should be based on long-term results, such as the term of three to five years in order to reflect stable performance. The system of remuneration should allow not only the postponement of the premium or its part for the period when the remaining risks associated with paid result will be known, but also their refusal or return if proven that they were granted on the basis of incorrect data from the results. The European Commission requires the procedures for setting compensation and the evaluation process to be transparent and properly documented. Criteria used for determination of remuneration should be accessible and known by the employees to whom they apply. Certain information about the remuneration policy should even be published, for example, in the annual accounts.

The internal audit departments should also be involved in the development of the remuneration policy; their staff should at least once a year carry out checks on whether the stated rules and procedures of remuneration have been followed.